July Inflation US - Annual

The starting point is unfavorable for a Yes outcome. June annual CPI was 3.5%, and this market needs July to fall by four-tenths of a point or more to 3.1% or below. That is a sizable one-month move for a headline annual measure, especially because annual inflation usually changes gradually unless there is a sharp swing in energy, a large base-effect distortion, or an unusually weak monthly CPI print. In other words, the hurdle is not just low inflation, but a noticeably better-than-recent sequence of data that has to arrive quickly.

The main argument against Yes is that the near-term backdrop points the wrong way. The recent decline in June was helped by lower gasoline prices, but the latest commentary suggests oil prices rose again because of Middle East tensions, which would put upward pressure on July headline inflation. Core inflation is still sticky enough that a one-month headline improvement may not be enough to pull the year-over-year rate down to 3.1%. Even if food and energy were favorable, the underlying pace would probably still need a strong downside surprise in shelter or other services to create that large a drop.

There are still a few paths to Yes, which is why the probability is not zero. A favorable base effect from July 2025 could help the year-over-year calculation, and if gasoline prices reversed hard late in the month or the monthly CPI came in flat to negative again, the annual rate could slide more than expected. But those are conditional, tail-event type scenarios rather than the central case. The market is already pricing a very low probability for 3.1% or less, and that looks broadly justified given the June level, the energy-risk backdrop, and the lack of evidence that inflation has broken decisively lower.